Weatherly suspends shares and seeks administration advice – a lesson in the importance of due diligence (WTI)

01 Jun 2018

Troubled miner Weatherly International (LSE:WTI) delivered the news its investors had feared today, confirming that it has had to suspend its shares and seek administration advice due to critical debt problems.

While the update will no doubt be disappointing for many in the market, the writing has been on the wall for some time now for Weatherly. The firm’s downfall should serve as a vital lesson in the importance of carrying out proper due diligence before investing.

In today’s RNS, Weatherly said that its loan facility provider Orion has confirmed that it is unlikely to permit further drawdowns to the company. Orion’s decision comes after Weatherly’s Tschudi mine was flooded by groundwater last month following a production blast, leaving future copper production uncertain. In today’s update, Weatherly said it is not currently possible to assess the length of time required before full mining operations can recommence or the financial impact the flooding will have.

As a result of Orion’s measures, Weatherly said that it cannot rely on the company for future support financially and has therefore decided to suspend its shares and seek advice about administration.

The problems at Tschudi will have been the final straw for Orion, which has been in ongoing negotiations with Weatherly over how it is going to pay its debt. Weatherly has repeatedly warned that it is unlikely to generate enough cash to meet all its rescheduled loan payments this year.

As a 24.6pc stakeholder in Weatherly with the right to veto over any material spend the firm wishes to make, Orion made Weatherly put itself up for sale last month and launched strategic review to secure repayment. It also prevented Weatherly from progressing with its purchase of the Kitumba mine in Zambia from ASX-listed Intrepid Mines, as published in December. However, by removing Weatherly’s sole source of production, the problems at Tschudi are likely to have hampered any progress made in this review.

Red flags

For many, the launch of the strategic review marked the beginning of the end for Weatherly, and today’s news will have been inevitable.

Weatherly had been attracting a great deal of retail attention over the last year thanks to repeatedly issuing updates with positive headline news. However, as at the end of December 2017, the firm had a massive $151m worth of total liabilities against a sub-£10m market cap and a loss of $5.9m for 2017.

As we have written before, the firm published several warnings about the increasing severity of its debt situation but hid them at the bottom of their announcements, beneath all the positive fluff. One only has to look at several of the firm’s recent RNS announcements to see this exercise in smoke and mirrors.

In February, the firm’s share price shot up by 47.4pc after it announced that it had agreed to purchase an additional 65pc of the high-grade Berg Aukas underground zinc-lead-vanadium project. Great, but flick to the bottom of the RNS, beneath all the administrative stuff, and the firm sneaks in the following: ‘The Company and its subsidiaries are unlikely to generate sufficient surplus cash to meet all loan repayments when due, particularly in the near term.’

Likewise, in another RNS earlier that month, Weatherly shot up 52.9pc after announcing that Intrepid’s shareholders have voted in favour of the firm acquiring Kitumba. But scroll right to the bottom, and we once again see the ghost at the feast: ‘The Company and its subsidiaries are unlikely to generate sufficient surplus cash to meet all loan repayments when due, particularly in the near term.’

The firm even gave this tactic a final outing last month, despite its problems being clear for all to see. In its RNS reporting that Tschudi had flooded, the business added in a line at the bottom stating that it remained unlikely to be able to repay its debts, despite the launch of the strategic review.

Lessons learned

Perhaps it is easy to say this in hindsight, but it looks like retail investors ignored the debt warnings in favour of top-line good news, making them resistant to the truth. Even the fact that chief executive officer Craig Thomas resigned in April didn’t appear to ring alarm bells for some.

We believe there are two key lessons to be learned in due diligence here. Firstly, and perhaps obviously, when a company says it is unlikely to be able to repay its debt it is best to avoid it – more often than not this will not end well. Weatherly had been warning investors that this would happen for months before the market caught, which brings us on to our second point.

Careful analysis of every line in an RNS can help to avoid getting caught up in dog investments like Weatherly. It also often pays to start reading announcements back to front as directors often try to sneak out the nasty news at the end. While it is a disagreeable practice, hiding news in plain sight is not technically illegal, and many companies will continue to get away with it. It is down to investors themselves to properly investigate their holdings.

Author: Daniel Flynn

Disclosure: The author of this piece does not own shares in any companies mentioned

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